Who is the named insured on a representations and warranties policy?

On most middle-market transactions the buyer is the named insured under a buy-side policy, which lets the buyer claim directly against the insurer rather than pursuing the seller. Buy-side policies typically waive subrogation against the seller except in cases of actual fraud, which is what allows a seller to accept a near-zero indemnity cap. Sell-side policies, which reimburse the seller for amounts owed to the buyer, exist but are used far less frequently.

Can representations and warranties insurance be purchased after a deal closes?

In limited circumstances a policy can be bound shortly after closing, but the standard and far safer approach is to bind at or before signing. Once a transaction has closed, insurers have less ability to verify the diligence process and will generally price the risk higher or decline it outright. Anything the buyer learned before binding is treated as a known issue and excluded regardless of when the policy is placed.

Does RWI cover fraud by the seller?

A buy-side policy generally covers losses from breaches of representations whether or not the seller acted fraudulently, which is one of its advantages over a traditional escrow. The insurer typically reserves the right to subrogate against the seller in cases of actual fraud, meaning it can recover from the seller after paying the buyer. That carve-out is narrow and does not affect the buyer's ability to collect on a valid claim.

What is a rate on line?

Rate on line is the premium expressed as a percentage of the policy limit, so a $10 million limit at a 3 percent rate on line costs $300,000. It is the standard way transaction liability pricing is quoted because it allows comparison across different limit sizes. In the middle market, rate on line for representations and warranties coverage commonly falls between 2.5 percent and 4 percent depending on industry, deal size, and available capacity.

Does fund-level management liability insurance cover portfolio company directors?

Generally no, because fund-level management liability responds to claims against the general partner, the management company, and the fund itself, not to claims arising from the operations of an acquired business. Directors your fund designates to a portfolio company board need coverage under that company's own directors and officers policy. Confirming that separate policy exists, with adequate limits, is a standard post-close checklist item after any platform acquisition.

Representations and Warranties Insurance in Middle-Market Deals: Cost, Retention, and Timing

Key Takeaways

Representations and warranties insurance shifts the risk of unknown breaches of a seller's reps from the seller's escrow onto an insurer, with the buyer as the named insured on most middle-market placements.
Premium typically runs 2.5 percent to 4 percent of the limit purchased, plus a non-refundable underwriting fee of $30,000 to $50,000.
Limits are commonly sized at 10 percent to 15 percent of enterprise value, mirroring the escrow the parties would otherwise negotiate.
The retention usually starts at 0.75 percent to 1 percent of enterprise value and steps down to roughly half that after twelve months.
Known issues, purchase price adjustments, and forward-looking statements are always excluded, and wage and hour, certain tax positions, and environmental matters are frequently excluded by deal.
Expect ten to fifteen business days from submission to bind, and start at signed letter of intent rather than at purchase agreement drafting.

What does representations and warranties insurance actually do?

Representations and warranties insurance, usually called RWI, pays the buyer for losses caused by a breach of the seller's representations in the purchase agreement, shifting that risk from the seller's escrow onto an insurer. Instead of chasing the seller after close, the buyer files a claim against a policy.

A representation is a factual statement the seller makes about the business: the financials are accurate, the contracts are valid, taxes have been paid, there is no undisclosed litigation. If one is wrong and the buyer suffers a loss, the indemnity provisions decide who pays.

RWI replaces most of that mechanism. Sellers get a clean exit and their proceeds at close, and buyers get a longer survival period without having to sue the founder they just hired to run the business.

Covers unknown breaches of the seller's reps, discovered after close
Policy periods typically run three years for general reps and six for fundamental and tax reps
Lets a seller reduce or eliminate escrow, which matters most for funds returning capital to LPs

Should the policy be buy-side or sell-side?

The overwhelming majority of RWI placements in the middle market are buy-side policies, where the buyer is the named insured and can claim directly against the insurer. Sell-side policies exist but are far less common.

A buy-side policy pays the buyer for its own loss and typically waives subrogation against the seller except in cases of actual fraud. That waiver is what makes a seller willing to accept a near-zero indemnity cap.

A sell-side policy instead reimburses the seller for what it owes the buyer, so the seller still has to be pursued first. Buy-side is the default.

What does RWI cost, and how much limit should you buy?

Expect a rate on line of roughly 2.5 percent to 4 percent of the limit purchased, meaning a $10 million policy commonly costs $250,000 to $400,000 in premium, plus an underwriting fee and surplus lines taxes. Rate on line is premium divided by limit, and it moves with capacity, deal size, and industry.

Limits are usually sized at 10 percent to 15 percent of enterprise value, mirroring the escrow the parties would otherwise have negotiated. On a $60 million deal that means a $6 million to $9 million tower, often built from a primary layer and one or two excess layers.

Budget the underwriting fee separately. It commonly runs $30,000 to $50,000, is paid whether or not you bind, and covers the insurer's outside counsel review. Most carriers also apply a minimum premium in the $150,000 to $250,000 range, which is why very small deals cannot always get there economically.

Rate on line typically 2.5 percent to 4 percent, higher for healthcare and financial services
Limit commonly 10 percent to 15 percent of enterprise value
Non-refundable underwriting fee of $30,000 to $50,000, due at the start of diligence
Premium is paid once at binding, not annually

How does the retention work, and does it drop over time?

The retention is the loss you absorb before the policy responds, and on most middle-market deals it starts around 0.75 percent to 1 percent of enterprise value and drops to roughly half that after twelve months. It works like a deductible that shrinks.

On a $60 million transaction, a starting retention near $600,000 stepping down to $300,000 after a year is normal. The step-down reflects the reality that most breaches surface in the first audit cycle after close.

How the retention is shared is negotiated. A common arrangement splits it, with the seller funding half through a small escrow. In competitive processes buyers increasingly absorb the full retention, and the seller walks with no holdback at all.

Starting retention commonly 0.75 percent to 1 percent of enterprise value
Step-down to roughly 0.5 percent after twelve months is standard
Often split evenly between buyer and seller, or absorbed entirely by the buyer

What do underwriters need before they will bind?

Underwriters need to see that you ran real diligence, meaning the near-final purchase agreement, your third-party diligence reports, data room access, and a one-hour underwriting call with the deal team. RWI insures the unknown, and the insurer's job is to confirm you actually looked.

The reports they want are the ones a sponsor commissions anyway: quality of earnings, legal, tax, and where relevant, benefits, environmental, and cyber. Thin diligence in one area produces an exclusion in that area, the most common avoidable outcome in the process.

The call is not a formality. Expect specific questions on customer concentration, revenue recognition, worker classification, and anywhere the reports flagged something and moved on.

Draft or executed purchase agreement with disclosure schedules
Quality of earnings report and legal diligence memo, in full, not summaries
Data room access for the insurer and its outside counsel
An underwriting call, usually 60 to 90 minutes, with the deal team present

What does an RWI policy not cover?

RWI excludes anything already known, anything that is not a breach of a representation, and a handful of categories carriers treat as uninsurable or deal-specific.

Known issues are excluded across the board. Anything disclosed in the schedules, surfaced in diligence, or discussed on the underwriting call falls outside the policy, which is why a separate contingent liability policy is sometimes placed for an identified risk.

Standard exclusions also include purchase price adjustment mechanics, forward-looking statements, and pension underfunding. Deal-specific exclusions frequently attach to wage and hour claims, transfer pricing, medical reimbursement, PFAS and similar environmental exposures, and cyber where diligence was thin.

Known matters, disclosed items, and anything raised on the underwriting call
Working capital and purchase price adjustment disputes, projections, and forecasts
Commonly excluded by deal: wage and hour, transfer pricing, PFAS, and reimbursement exposures

How does RWI change escrow and deal speed?

RWI typically shrinks the indemnity escrow from the traditional 10 percent of purchase price to between zero and 1 percent, and it takes indemnity off the critical path. That is the practical value for a deal team under a signing deadline.

For a seller returning capital to limited partners, holding back $6 million for eighteen months versus holding back nothing is the difference between distributing now and distributing later. That argument wins auctions.

For a buyer the trade is favorable. You give up the claw-back against a seller who knows the business, and you gain a three to six year survival period and a counterparty still solvent when a tax assessment lands in year four.

What is the timeline from NDA to bind, and what else should a sponsor carry?

Plan on ten to fifteen business days from submission to bound policy, though an experienced team with clean diligence can compress it to five to seven. The sequence is predictable: indication letters, carrier selection, underwriting fee, insurer diligence, the call, then a negotiated policy form tracking toward signing.

Start at signed letter of intent, not when you are drafting the purchase agreement. Late submissions produce broader exclusions because the insurer has less time to get comfortable.

RWI is one policy in the tower a sponsor carries. Management liability at the fund level covers the general partner, its principals, and the fund itself, and investment adviser errors and omissions, which covers claims arising from advisory services, is often bundled with it. Separate D&O sits at each portfolio company, since fund-level coverage does not follow your board designees down to the operating entity.

Indication letters within two to three business days of submitting the agreement and model
Underwriting fee paid, then three to five days of insurer diligence
Bind at or shortly before signing, with inception at signing or closing
Confirm portfolio company D&O exists separately from fund-level management liability

Frequently Asked Questions

This article is for general information and is not a substitute for policy language or professional advice.

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